Just Because The Ratio For Payment Of Service Tax Not Adhered To, Assessee Not Liable To Pay Double Tax As Penalty: Karnataka High Court

The Bench, consisting of Justices S. Sujatha and Shivashankar Amarannavar, held that the reverse charge mechanism should not lead to double taxation.

The respondent/assessee M/s. Zyeta Interiors Pvt. Ltd. is registered under the Service Tax Provisions. After the assessee received a show cause issued by the Principal Additional Director General, Directorate General of Goods & Services Tax Intelligence (DGGSTI), the assessee submitted an application for settlement of the proceedings.

The Settlement Commission passed an order confirming the service tax liability along with the interest and penalty levied on the Director of the assessee company.

Against the order passed by the Settlement Commission, the assessee filed a writ petition before the Karnataka High Court. The Single Judge allowed the writ petition by quashing the part of the order challenged by the assessee, and remitted the matter back to the Settlement Commission for a fresh consideration. Against this order, the revenue department filed an appeal before the Division Bench of the Karnataka High Court.

The revenue department submitted that as per the provisions of Section 68(2) of the Finance Act, 1994, as applicable in the relevant period, the ratio of tax payable by the assessee/service recipient and the service provider was 75:25. Hence, the revenue department contended that the assessee was required to pay 75% of the service tax.

The revenue department averred that with effect from 20.06.2012, the ratio of tax payable by the assessee/ service recipient and the service provider was altered from 50:50 to a ratio of 75:25. The revenue department added that the said ratio remained operative up to 01.04.2015.

Thus, the revenue department contended that the tax paid by the assessee/ service recipient and the service provider in the ratio of 50:50 was not in conformity with the provisions of Section 68(2) of the Finance Act, 1994, as applicable at the relevant time. The revenue department added that the Single Judge should not have reversed the findings of the Settlement Commission on this aspect.

The revenue department submitted that the photocopies of the invoices furnished by the assessee were not the required documents as prescribed under Rule 9 of the CENVAT Credit Rules, 2004 to avail CENVAT Credit. Thus, the revenue department averred that the Single Judge ought not to have remanded the matter back to the Settlement Commission.

The assessee M/s. Zyeta Interiors Pvt. Ltd. contended that the reverse charge mechanism should not lead to double taxation. The assessee averred that the service tax was paid in full by the assessee/service recipient and the service provider in the ratio 50:50, therefore, it cannot be held that there was a short payment of service tax.

The Court held that despite the ratio in which the service tax was paid by the assessee/service recipient and the service provider, the entire amount of service tax due was deposited with the ex-chequer. The Court ruled that merely because the ratio in which the service tax was to be paid was not strictly adhered to, as envisaged during the relevant period, the assessee cannot be made liable to pay double tax and thus, the assessee cannot be denied CENVAT Credit. The Court added that the discharge of entire amount of service tax was not disputed. Thus, the Court ruled that the reverse charge mechanism should not lead to double taxation.

The Court observed that the Single Judge had remanded the matter back to the Settlement Commission for a fresh consideration on the ground that the assessee was willing to produce original invoices for availing CENVAT Credit.

The Court thus upheld the order of the Single Judge remanding the matter to the Settlement Commission for reconsidering the matters afresh.

Case Title: The Vice Chairman Settlement Commission & Anr. versus M/s Zyeta Interiors Pvt. Ltd & Anr.

Citation: 2022 LiveLaw (Kar) 189

Dated: 7.04.2022 (Karnataka High Court)

Counsel for the Appellants: Mr. Jeevan J. Neeralgi, Advocate

Counsel for the Respondents: Mr. V. Raghuraman, Senior Counsel A/W Mr. C.R. Raghavendra, Advocate

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